India does not yet have a tri-service military organisation that can effectively coordinate between the army, navy and air force in equipping, manning and planning for battle. But it now has a building for one.

Defence Minister Arun Jaitley today unveiled the foundation stone for the Headquarters of the Integrated Defence Staff (HQ IDS), which has functioned since 2001 as a rump organization without real powers. This after two high-power bodies --- the Kargil Review Committee and a Group of Ministers (GoM) --- recommended the appointment of a powerful chief of defence staff (CDS), who would be the top commander over all three services.

This five-star ranked CDS was to oversee the four-star ranked chiefs of the army, navy and air force. He would be a single point of advice to the government on military matters.

With political and bureaucratic opposition to such a powerful post mounting, Prime Minister Atal Behari Vajpayee’s government quickly backtracked. Citing the need for “political consultations”, which has been echoed over the last ten years by the United Progressive Alliance, the government set up HQ IDS in Oct 2001, headed by a three-star officer who is junior to the chiefs of the army, navy and air force. With no power to implement joint service decisions, the IDS has remained a relative backwater to which vocal and inconvenient officers can be sidelined.

Meanwhile, the job of tri-service chief --- termed the Chairman Chiefs of Staff Committee, or COSC --- is carried out by the senior-most serving chief. He is expected to play this role in addition to commanding his own service.

The BJP manifesto has undertaken to address the issue of higher military command. So far, however, a permanent defence minister is still awaited.

Speaking at the inauguration, Mr Jaitley declared that in future almost all operations, be they inland or overseas, were invariably going to be tri-service operations. Developing synergy between the services to achieve optimum force application therefore attains utmost importance, he remarked.

As a step
towards galvanising defence manufacture, the government on Thursday published a
concise list of defence equipment that requires a licence to manufacture in
India.

The
Department of Industrial Policy & Promotion (DIPP), which functions under
the Ministry of Commerce and Industry (MoCI), has issued a list that was drawn
up by the Ministry of Defence. It includes four categories of defence equipment
that require compulsory production licences: (a) Tanks and other armoured
fighting vehicles; (b) Defence aircraft, space craft and parts thereof; (c)
Warships of all kinds; and (d) Arms and ammunition and allied items of defence
equipment; parts and accessories thereof.

The policy,
promulgated in DIPP’s Press Note No 3 of 2014, states: “Items not included in
the list would not require industrial license (sic) for defence purposes.
Further, it is clarified that dual use items, having military as well as
civilian applications, other than those specifically mentioned in the list,
would also not require Industrial License from Defence angle.”

This seeks
to provide policy clarity in a field complicated by issues like dual-use
products. A spanner, for example, can be used on both tanks and private cars; there
is ambiguity about whether it is a defence product.

Welcoming
the announcement, the Confederation of Indian Industry (CII) says it would
streamline the issuance of industrial licences for defence manufacture, and
encourage new entrepreneurs in the sector.

“We are
happy to see that Ministry of Defence has taken cognizance of CII’s
recommendations to prune the list and keep it to the bare minimum” said Baba N
Kalyani, Chairman, CII National Committee on Defence.

Some
defence software engineering companies believe that defence/embedded software
should also require production licences. Says Rahul Chaudhary, the co-chairman
of Ficci’s defence committee: “These are highly classified and security
sensitive products that cannot be treated like just any piece of software.”

The
government move to designate defence products is for licensing purposes, but
this is as essential for export control. New Delhi expects membership of the
Wassenaar Arrangement --- a multilateral export control regime between 41
states that regulates the international transfer of conventional weapons and
dual-use technologies. This would require clearly designating defence products.

In 2004,
MoCI’s Directorate General of Foreign Trade (DGFT) promulgated a so-called
SCOMET List (List of Special Chemicals, Organisms, Materials, Equipment and
Technologies), which identified sensitive items relating to nuclear, biological
and chemical (NBC) warfare; special materials; stealth technologies;
aeronautics and rocket materials. Yet Category 6 --- earmarked for defence
equipment --- has not yet been filled. The SCOMET List merely states that it is
“Reserved”.

Even though
an export control list is separate from a licensing list, there is speculation
that the new list will eventually flesh out SCOMET’s Category 6. For now there
is little pressure on the government to draw up Category 6, since the ministry
of external affairs is holding back on joining the Wassenaar Arrangement. New
Delhi is demanding simultaneous membership in all four global non-proliferation
agreements: Nuclear Suppliers’ Group; Wassenaar Arrangement; Australia Group
and the Missile Technology Control Regime.

Over the
years, the SCOMET List has been populated more due to domestic and bilateral
imperatives than the need to join non-proliferation regimes. Category 0 of the
SCOMET List, which designates nuclear materials, was updated in July 2005 after
parliament passed the Weapons of Mass Destruction and their Delivery Systems
(Prohibition of Unlawful Activities Act), 2005, to address US concerns over the
danger of nuclear proliferation. This was one of Washington’s pre-conditions for
taking forward negotiations on the US-India nuclear deal.

Analysts
point out that today’s list of defence products is clearly modelled on the
Wassenaar Arrangement munitions list, but is far less detailed. For example,
the list only generically mentions, “energetic materials, and related substances includes all
explosives like primers, boosters, initiators, igniters, detonators, etc”,
which covers a large number of commercial, non-military-grade products.

In contrast, the Wassenaar Arrangement specifies the “total
impulse capacity”, the “specific impulse”, “stage mass fractions”, of a
propellant. The US “Munitions List” has a detailed listing of the explosives it
considers military grade; specifying that it must have “detonation velocity
exceeding 8,700 metres/second at maximum density or detonation pressure
exceeding 340 kilobars”. All this would require to be worked into the SCOMET
List.

The Industrial
Development and Regulation Act, 1951 (IDR Act) requires a licence for producing
any defence product in India, a requirement that continued after defence
production was opened to the private sector through Press Note No 4 of 2001.
This states: “The defence industry sector is opened up to 100% for Indian
private sector participation with FDI permissible up to 26%, both subject to
licensing.”

Wednesday, 25 June 2014

The
Confederation of Indian Industry (CII) has overruled some of its
own defence committee members in recommending that foreign direct investment
(FDI) in defence should be capped at 49 per cent.

At a stormy
meeting in New Delhi on Tuesday, a near-plenary session of CII’s defence
committee, chaired by Bharat Forge chief, Baba Kalyani, overruled co-chairman,
Nikhil Gandhi of Sea King Infrastructure Ltd (SKIL), who wants foreign
companies to be automatically permitted majority stakes in Indian defence firms.

The
controversy has been boiling within CII since a meeting on Saturday between
senior ministry of defence (MoD) officials and industry bodies, where Gandhi
had recommended on behalf of CII that 51 per cent FDI should be allowed through
the automatic route, with higher FDI permissible in cases where high-technology
was being brought into India.

This led to
defence majors like L&T and Bharat Forge expressing their ire to CII
president, Ajay Shriram. Today, the CII defence committee overruled Gandhi,
recommending that no more than 49 per cent FDI should be allowed through the
automatic route, with higher FDI permissible “only on a case-by-case basis.”

Several CII
defence committee members confirm that this is now the official CII position,
which conforms to that of industry bodies, Ficci and Assocham.

CII’s
defence committee noted today that defence was a strategic sector where governments
control technology, not companies; and that a government could legitimately refuse
to release high technology even to a fully owned subsidiary in India.

Industry
sources who attended today’s meeting tell Business Standard that some defence
company owners are arguing for higher FDI simply in order to divest their
holdings later for a hefty profit to foreign vendors.

Nikhil
Gandhi flatly rejects such motivation on the part of SKIL. He points out that
his shipbuilding facility, Pipavav Shipyard, has an order book position of Rs
2,000 crore and world-class infrastructure for warship building. “What is the
problem with allowing foreign majority holding if that brings in technology,
creates jobs and develops infrastructure in the country?” asks Gandhi.

Even so,
the CII meeting on Tuesday flatly rejected the notion that raising FDI in
defence would create manufacturing jobs. Noting that defence production did not
yet provide a level playing field for India’s private companies, CII demanded
that defence be fully opened for the private sector before allowing in global
vendors.

“In
1991-92, hundreds of SMEs were killed off when the economy was liberalised.
Before such a liberalisation in defence, Indian defence companies should get at
least a decade to build their capabilities and ready themselves to face global
competition,” says a senior defence industry executive who was present at the
meeting.

The debate
over FDI in defence has been resumed after the Department of Industrial Policy
& Promotion (DIPP) has floated a proposal to raise the current 26 per cent
FDI cap in defence, mooting alternative caps of 49, 74 and 100 per cent.

The MoD
internally holds that defence industry must be protected with a 49 per cent
cap. Consensus between all the major industry bodies would make it almost
certain that the DIPP proposal would be capped at 49 per cent.

Tuesday, 24 June 2014

The one
positive from having Arun Jaitley run the ministry of defence (MoD) in addition
to his time-consuming job as finance minister is that, like Pranab Mukherjee,
he will be better equipped to evaluate defence expenditure proposals that come
up to the finance ministry. On the flip side, his current preoccupation with
the finance ministry would leave him little time to scrutinise the fundamentals
--- whether the military is manned, equipped and run effectively, why weaponry is
imported and what policies could promote indigenous defence production. It
would be tragic if Mr Jaitley concludes that boosting overseas arms procurement
is the way to strengthen the military. It can be safely assumed that, despite
the tight fiscal situation, BJP optics will trigger a moderate rise in the
capital budget. What remains to be seen is whether Mr Jaitley directs most of
that money to the international arms bazaar or to shoring up India’s defence
production capability.

An example
of this is the defence ministry’s key procurement dilemma: that is whether to
sign the controversial, Rs 1,00,000 crore contract for 126 Rafale fighters for
the Indian Air Force (IAF). The new government would relish the glitzy spectacle
of a Rafale signing ceremony. That would please the public and placate the IAF,
but it would also require allocating Rs 15,000 crore as the signing advance;
and commit the IAF to annual instalments of some Rs 10,000 crore, payable
yearly till 2023-24.

Yet a searching
examination by Mr Jaitley would have discovered that a fraction of that expenditure
--- spent on improving the serviceability rate of the Sukhoi-30MKI --- could
generate equivalent combat power. By 2019, the IAF will have 272 Sukhoi-30MKIs,
yet poor maintenance and inefficient spares management ensures that just 40 per
cent of these fighters are combat-ready at any given time. Effectively, the IAF
has just 109 combat-ready Sukhoi-30MKIs; 272 is an illusory number. Raising
serviceability to 75 per cent, which is par for any self-respecting air force,
would add 95 fighters to the numbers operationally available. That is precisely
the number of Rafales that would be operationally available from a 126-fighter
fleet, given a 75 per cent serviceability rate.

This mind-boggling
truth needs reiteration, since the IAF and the MoD gloss over it --- spending
Rs 5,000 crore to boost Sukhoi-30MKI serviceability would “buy” as many
additional fighters as the purchase of 126 Rafales for Rs 1,00,000 crore. The
IAF lament of “dwindling squadron numbers” is a red herring; more important is
the number of fighters available in each squadron.

Further, abandoning
the Rafael would save money for a light fighter fleet, and also build an
indigenous aerospace industry. The IAF’s obsolescent MiG-21 and MiG-27 fleets
could be replaced economically with an improved (or Mark II) version of the
Tejas Light Combat Aircraft (LCA), its development and manufacture accelerated
through a strategic alliance with Swedish company, Saab, which is close to completing
the Gripen-E, a fighter very much like what the IAF wants the Tejas Mark II to
be. With the Defence R&D Organisation (DRDO) cooperating with Saab, a
world-class Tejas Mark II would start joining the IAF fleet by 2019 (assuming five
years for development and testing); and a second aircraft manufacturing line would
be established in India, complete with an airfield, to complement the HAL
facilities at Bangalore. Further, a project like this would catalyse an entire
aeronautical design and manufacturing eco-system, especially the small and
medium firms that wither away when the government buys overseas, rather than
innovates and produces domestically. Alongside this, aerospace engineering
courses could be sponsored in selected technological institutes, which would feed
into the indigenous design and manufacture of an advanced medium combat
aircraft (AMCA), a project already under way. Finally, with the change left
over from Rs 1,00,000 crore, New Delhi could press Stockholm hard to buy out Saab’s
aerospace division. The Swedish government might resist, but its decision would
eventually be driven by how much it wants a strategic alliance with an emerging
superpower like India.

The army
faces similar dilemmas, with expensive overseas buys counter-posed against
indigenous alternatives --- whether to buy more Russian T-90 tanks or expedite
the DRDO’s Future Main Battle Tank (FMBT) project that has languished for
years; whether to buy more Russian armoured carriers or fast track the Future
Infantry Combat Vehicle (FICV) that India’s defence industry is to develop. For
critically-needed artillery guns, the dilemma is whether to approach the
international arms bazaar, or sponsor industry-led consortia to develop the
guns in India, while confining overseas purchases to high-tech purchases like
the ultralight howitzer (ULH) that require materials and engineering
technologies currently out of reach for us. In each case the MoD faces
temptation to seal a quick overseas deal; but also has the opportunity to build
genuine, long-term defence capability through an indigenous product that slashes
life-cycle costs to obtain “bang for the buck”.

The policy
framework for going swadeshi already exists.
Ironically it was created by the Antony MoD, which then lacked the political
courage to implement its own policies. The Defence Procurement Procedure of
2013 explicitly states that indigenous development and manufacture is the
default option. There is a Defence Production Policy to encourage manufacture.
More policy initiatives are needed, especially in reducing duties and tariffs
for domestic industry that, incredibly, pays higher taxes for building weaponry
in India than foreign vendors pay for importing it fully built. The domestic
industry must be protected against variation in foreign exchange rates; export
of defence equipment must be not just permitted, but actively encouraged; and
foreign direct investment in defence must be automatically allowed up to 49 per
cent.

Saturday, 21 June 2014

At a
meeting scheduled in New Delhi on Saturday between senior MoD brass and defence
industry bodies, the Confederation of Indian Industry (CII) is set to align
with the Federation of Indian Chambers of Commerce and Industry (Ficci) in restricting
foreign direct investment (FDI) in defence to 49 per cent.

With the
two biggest industry bodies on common ground, the ministry of defence (MoD) ---
which has always held that defence industry must be protected ---would then
ensure that a ministry of commerce and industry (MoCI) proposal to allow as
much as 100 per cent FDI in defence would be restricted to 49 per cent.

The MoCI
proposal to raise the current 26 per cent FDI cap in defence moots FDI options
of 49, 74 and 100 per cent. In response Ficci supported up to 49 per cent, but
its June 13th press release cited the “strategic nature” of defence
industry to place stringent conditions on FDI above that limit. In contrast,
CII President Ajay Shriram declared on June 10th that foreign
investors could be allowed “majority equity” since FDI in defence would raise manufacturing
growth.

Business
Standard has learned that L&T, an emerging defence powerhouse that played a
large role in shaping Ficci’s 49 per cent position, objected to CII’s stance as
an influential founder member of that industry body. Another influential CII
member, Bharat Forge, which is also making a major play in defence, joined
L&T in pressuring CII to recommend a 49 per cent cap.

This
disagreement echoes a similar confrontation in 2010 over a discussion paper floated
by the Department of Industrial Policy & Promotion (DIPP), proposing liberalisation
of defence FDI. After CII supported greater FDI, Baba Kalyani of Bharat Forge,
who then headed CII’s defence committee, stepped down, protesting that CII had
not discussed the matter in the defence committee. Today, the CII president has
again supported FDI liberalisation without first discussing it in the defence
committee.

The
discussion on Saturday will take place at the Institute for Defence Studies and
Analyses (IDSA) in what has become an informal, but regular, meeting forum between
the MoD and representatives of private industry bodies. Instituted by the
previous MoD acquisitions chief, the Saturday forum has resolved several
roadblocks towards providing the private sector a larger role in developing and
manufacturing defence equipment.

Tomorrow’s
meeting will be attended by the MoD’s acquisitions chief, as well as by
Secretary (Defence Production), Gokul Chandra Pati.

Business
Standard learns that CII is likely to discuss the issue internally and then issue
a revised press release on June 24, recommending a 49 per cent cap on FDI in
defence. Like Ficci, CII could propose that foreign companies be allowed
majority stakes, even full ownership, only if they fulfil stringent conditions
such as transferring cutting-edge technology, retaining Indian control and
employment, and keeping Intellectual Property Rights in India.

Thursday, 19 June 2014

A day after
this newspaper reported that the Confederation of Indian Industry (CII) and
Federation of Indian Chambers of Commerce and Industry (Ficci) had divergent
positions on over the government’s proposal to liberalise foreign direct
investment (FDI) in defence (“CII & Ficci disagree on raising FDI in
defence”, June 12, 2014) a traditionally protectionist Ficci attempted to paper
over its divergence with a CII that has whole-heartedly endorsed higher FDI.

On June 13,
Ficci said in a press release that it “welcomes the proposal put forth by the
Ministry of Commerce and Industry to enhance FDI levels in defence beyond 26%
to higher levels up to 49%, 74% or even 100% in exceptional cases”. Yet Ficci threw
in a demand for “safeguards” that recognised “the strategic nature of the
defence sector.”

It is evident
that there are divergent views on the advisability of raising FDI in defence. An
assortment of players in the defence economy each seeks an FDI regime that best
serves its interests.

Business
Standard has mapped the following seven major interest groups, each of which
lobby for their preferred FDI level depending upon where they are located on
the industry canvas.

The first
category of FDI lobbyists consists of professional managers and chief
executives of defence companies. These are basically employees, who do not hold
a significant share of the defence company they run. Many are accomplished and
competent professionals who enjoy credibility within the defence industry, including
industry bodies, as also with the defence ministry. They argue for raising the FDI
cap to 49 per cent, with the proviso that “control of the company should remain
in Indian hands.” Their motivation is self-interest: allowing more foreign
capital and management practices would raise their emoluments, while the jobs would
remain protected by the proviso that Indian nationals must run the defence
companies.

A second
category of FDI inputs comes from professional managers of companies like
L&T, who are also part owners through shareholding accumulated over time.
These managers want foreign investment and technological expertise to galvanise
growth in their defence units, but without disrupting their control. They
argue, as L&T boss AM Naik has done in a recent media interview, that, “We
should agree to 49 per cent, subject to genuine transfer of technology. But
nowhere in the world, even in the most advanced nations like the United States,
which has a high-tech defence sector, do they allow foreign companies to own a
majority stake.” Ficci directly echoes this viewpoint.

A third
category includes companies with some valuable defence and engineering
capabilities, who would harness international partners to expand their
opportunities. For example, Bharat Forge knows that the Indian market for
artillery guns --- a prime area of expertise --- would be limited to about Rs 25-30,000
crore. Expanding into related fields like opto-electronics and networking
systems would expand the market manifold. Without in-house capability in these
technology domains, these companies need foreign partnerships. The foreign OEM gains
access through the Indian company; which, in turn, benefits from high
technology. Thus the CII’s welcome of even a “foreign investor having majority
equity.”

The fourth
category includes established corporates like the Tatas, who see big profits in
defence but remain uncomfortable with the unpredictability and murk of defence
contracting. Seeking a hedge in higher foreign ownership, some of these
companies have already made profits in the past through strategically divesting
their share to a foreign partner --- e.g. Tatas to Lucent in telecom, and to
Honeywell in process management and control solutions; and the BK Modi group to
Alcatel. This kind of divestment takes place most profitably in a gradually
liberalising FDI regime that permits incremental equity dilution. For the
present, this group would back 49 per cent dilution with control remaining in
Indian hands and would incrementally back greater FDI and looser control.

The fifth category
of FDI lobbyists follows what could be called the “Ranbaxy model”. These
include small-to-medium, family-owned businesses that have established themselves
painstakingly in a hostile, anti-private-sector policy environment. The owners,
some facing internal boardroom battles, would be relieved to encash their hard-won
success by selling their entire holding to foreign buyers. Having fought the
establishment for years, these entrepreneurs feel they deserve a good
retirement. This group is prominent in arguing for 100 per cent FDI.

A sixth group
that also wants full FDI liberalisation comprises of several relatively new
defence companies that were set up after defence production was opened to the
private sector in 2001. While masquerading as technology developers, these
companies are actually “build-to-print” manufacturers of foreign --- especially
Israeli --- defence equipment.

A seventh
category, which wants no liberalisation to the current 26 per cent FDI cap, comprises
genuine, home-grown entrepreneurs that have created high-technology products
through in-house research & development. This includes many micro, small
and medium enterprises (MSMEs), and several larger companies like Zen
Technologies, Data Patterns and Astra Microwave. These companies want maximum
protection from foreign competition in order to grow and increase their
valuations manifold. The slogan of one such CEO: “The future is bright; the
colour is saffron.”

Interest groups pitching
for various FDI levels

1

Defence companies run
by professional managers, CEOs, who want better emoluments, but control in
Indian hands

Tuesday, 17 June 2014

More than
two years after India’s defence ministry (MoD) chose to buy 126 Dassault Rafale
fighters for the Indian Air Force (IAF), the world’s biggest fighter contract twists
in the wind. With no deal in sight after 28 months of haggling with Dassault, two
of the losing vendors --- Eurofighter and Saab --- believe they could yet come
out tops.

Eurofighter
GmbH, whose Typhoon fighter narrowly lost out to the Rafale, still retains a
senior executive in New Delhi. This is to allow Eurofighter --- the official
runner-up --- to quickly step in should negotiations with Dassault collapse.

Swedish
company, Saab, whose Gripen-D light fighter was evaluated but not selected, similarly
believes the contract remains open. Saab places hope in a proposal that it
formulated with the Defence R&D Organisation (DRDO) to co-develop and co-manufacture
the improved Tejas Mark II Light Combat Aircraft (LCA). This affordable, indigenous,
single-engine fighter could be built in numbers, providing the IAF a more
economical and effective option than limited numbers of enormously expensive,
twin-engine Rafales.

Saab
believes that a successful Tejas Mark II would erode the need for the Rafale.
The Swedish company has offered co-development and co-manufacture of the Tejas
Mark II, even whilst fielding the cheapest and most economical fighter of the
six in the fray.

As IAF
officers confirm, India had intended to buy a cheap, light fighter to replace
the IAF’s MiG-21s as they were phased out of service. In late 2004, the IAF
sent out a “request for information”, to four manufacturers of small, cheap
fighters --- the Russian MiG-29; the American F-16; the French Mirage-2000-5,
and the Saab Gripen.

Only in
August 2007, when the IAF issued a formal tender --- termed “request for
proposal”, or RfP --- were expensive, twin-engine fighters like the Eurofighter,
Rafale and F/A-18 regarded as options. Today, with the economy stuttering, the daunting
prospect of paying Rs 1,00,000 crore for 126 fighters could mean that low cost
becomes decisive.

Saab sees
further advantage in backing the indigenous horse, the Tejas Mark II. The
Swedish company claims it is best suited for upgrading the Tejas Mark I, since
it is currently upgrading the Gripen-D by fitting a new engine, the General
Electric F-414 power pack. Upgrading the Tejas Mark I to Mark II specifications
involves exactly the same upgrade.

The last
DRDO chief, Dr VK Saraswat, was convinced that Saab’s assistance would be ideal
for the Tejas programme. In 2012, the DRDO sent Saab a “Request for
Information” asking for a rough estimate of costs, which Saab duly submitted.

In Jan
2013, DRDO followed up with a “Request for Proposal”, or RfP, asking for
technical and financial bids for Saab to jointly audit the Tejas design with
DRDO. Saab had proposed an 8-10 month long audit, after which a fresh design
would be finalised and a manufacturing line established.

MoD sources
tell Business Standard that Saab proposed in 2011 to co-develop the Tejas Mark
II and roll it out from a new manufacturing line within five years. Saab wanted
at least 51 per cent ownership of the joint venture company that built the new
Tejas, to be free of government controls and procedures.

By May
2013, a joint design contract seemed imminent, says Saab. But, on June 1, a new
DRDO chief, Dr Avinash Chander, took charge and Saab was unofficially told that
DRDO could not co-develop the Tejas with a foreign company without an
international tender to select the partner.

Contacted
for comments, a DRDO spokesperson told Business Standard that design work on
the Tejas Mark II is proceeding satisfactorily without a foreign partner.

In fact, MoD
sources admit the Tejas Mark II programme faces significant design challenges
beyond merely fitting a new engine. The Tejas Mark I was not designed with
operational availability in mind, with important systems placed in inaccessible
places that take time for technicians to reach. The Gripen-D, in contrast,
requires just 5 man-hours of maintenance for an hour of flying. (The figure for
the Tejas in not available, but the Rafale is estimated to require 15
man-hours).

Furthermore,
the new F-414 engine would require the Tejas’ length to be increased by half a
metre. In addition, experts say the air intakes will have to be redesigned,
since they do not allow in sufficient air for even the F-404 engine, far less
the more powerful F-414 that will be fitted.

Aerospace
analysts acknowledge Saab’s expertise in building economical and effective
fighters. The Gripen-D costs half as much as a Rafale. International expert,
Jane’s, puts the operating cost of a Gripen at $4,700 per flight hour, while
flying a Rafale for an hour costs $15,000.

Wednesday, 11 June 2014

Any decision to raise the foreign direct investment
(FDI) cap of 26 per cent in defence production would be contentious. Sharp
disagreement on the issue has surfaced between India’s biggest two industry
bodies --- the Confederation of Indian Industry (CII), and the Federation of
Indian Chambers of Commerce and Industry (FICCI).

CII, which includes manufacturing powerhouses like
Bharat Forge, sees higher FDI as a catalyst for defence manufacture and job
creation. On the other hand, FICCI, which includes innovation majors like
Larsen & Toubro and Tata Power (Strategic Electronics Division), say higher
FDI will not translate into greater indigenisation. Since defence technology developed
by foreign original equipment manufacturers (OEMs) is controlled by their
governments, FICCI says its transfer will be based on strategic considerations,
not company ownership patterns.

On Tuesday, CII president, Ajay Shriram, welcomed the
government’s proposal to raise the FDI limit. Lamenting that just $4.8 million
of FDI had flowed into India since private firms were allowed into defence in
2001, Shriram said permitting foreign firms to own majority stakes in Indian
defence companies would leverage India’s purchasing power, IT infrastructure
and manufacturing potential to make the country a “key global manufacturing hub
for defence systems and equipment.”

Earlier, in a 2012 report titled “Creating a Vibrant
Domestic Defence Manufacturing Sector”, CII had projected that the defence and
aerospace sector could create 10 lakh new jobs in the country. On Tuesday, CII
said this would be accelerated by liberalising FDI.

The CII statement endorses “majority equity” for
foreign OEMs without specifying an upper limit. The Department of Industrial
Policy and Promotion (DIPP) has recently circulated for comments a proposal
that mentions three possible levels of FDI --- 49, 74 and 100 per cent.

FICCI, in contrast, wants FDI capped at 49 per cent,
subject to tight conditions. Writing to DIPP in 2012, FICCI said control must
remain in Indian hands; the foreign OEM must brings in “key technologies as
required in the priority list of the Ministry of Defence”; the foreign
company’s home government must provide “in-principle permission to share
technology with Indian partner”; Intellectual Property Rights (IPR) generated
by the joint venture must reside in India, as well as other conditions.

FICCI officials reject the notion that raising FDI stimulates
domestic manufacture. They point out that although 74 per cent FDI was allowed
in telecom, which was raised to 100 per cent last year, India’s electronics
import bill is on course to surpass the oil import bill by 2020.

In contrast, defence self-reliance is highest in the
nuclear, space and ballistic missile fields, where international technology was
comprehensively denied to India. In these three fields, government agencies
partnered the private sector to develop indigenous technologies and systems.

Rahul Chaudhry, who was a member of the Vijay Kelkar
Committee on defence indigenisation, and who heads a leading private sector
defence company says, “The notion that higher FDI will increase indigenisation
and create jobs ignores the fact that value lies not in build-to-print
know-how, but in design, i.e. in “know-why”. The defence public sector in India
has created many assembly lines for “Made in India” equipment. Yet we have
never had control over the technology that goes into what these assembly lines
build. What we need are “India Made” products, designed in India, with the IPR residing
here.”

“If permitting 100% FDI for building products for the
world largest cellular phone market has not spawned a single world-class Indian
company that manufactures cellular handsets or infrastructure, how will it
happen in defence?” asks Chaudhry.

Even so, the BJP seems poised to liberalise FDI in
defence. Addressing parliament on June 9, President Pranab Mukherjee said, “We
will introduce policies to strengthen technology transfer, including through
liberalised FDI in defence production.”

In its election manifesto, released in May, the BJP promised
it would “encourage private sector participation and investment, including FDI
in selected defence industries.”

The current FDI cap was promulgated in 2001, when
defence was opened up for the first time to the private sector. The DIPP’s
Press Note No 4 of 2001 (paragraph iii) said, “The defence industry sector is
opened up to 100% for Indian private sector participation with FDI permissible
up to 26%, both subject to licensing.”